Saturday, February 18, 2017

Paying debt by snowball

When you were a kid rolling a snowball in the backyard, the best way to do it was to pack some snow into a tight ball, then start rolling it through the yard. Your snowball would become a snow boulder much quicker than it would if you just built it up by hand. That’s exactly how the debt snowball method works.The debt snowball is perhaps the most life-changing Baby Step you'll experience in your total money makeover. Once you’re on Baby Step 2—that means you are current on all your bills and have your $1,000 starter emergency fund saved up—list your debts smallest to largest by amount owed. Don't worry about interest rates. We don't care if one debt has a 2% rate and another one has a 22% rate.Now it's time to make progress.Pay minimum payments on all of the debts except the smallest one then attack that debt with a vengeance. We're talking gazelle intense, sell-out, get-this-thing-out-of-my-life-forever energy. Once it’s gone, take the money you were putting toward that debt, plus any extra money you find, and attack the next debt on the list. Once it’s gone, take that combined payment and go to the next debt. Knock them out one by one.Here’s an example. Let's say you have the following debts:

This is a commonly prescribed method. But the Eulerites say you should pay off the highest interest debt first. Why the difference?The short answer is the economy does not compound, it requantizes, the curve can invert, suddenly. So the underlying assumption is that the person has too much debt. The person suffers more currency risk than he should, and risk is highest on his short term debt, for some reason. The person will continue paying long term interest that is stable if the short term interest at risk is removed.The difference between the two models is volatility is managed in one case, at the expense of requant. But volatility is assumed naturally minimized in the other case. Managed volatility is what the bit error function is about, but it relies on price compression, or asynchronous amortization for the S&L.Think of the frequentist as computing odds without replacement and the bayesian computing probability with replacement. We do managed histograms, and the cash device in our hand does these. That is necessary to price currency risk, along with a few other components of the sand box.